The Fallacy of Stock Screening

In late September I wrote an article on Stock Screening and provided an example as to why it should only be the beginning, not the end, of any initial research efforts in uncovering potential new investment ideas. The point of this article is to expand my thoughts on stock screening and to provide additional insight as to why, specifically, stock screening is NOT a tool I like to utilize. 

Do you know how often I screen for stocks? VERY RARELY. Why? Because I want to uncover ideas that no one else can possibly uncover. After all, stock screening puts all investors on the same playing field; it is a tool accessible by anyone who wants to use it, it provides the same information to anyone who uses it who screens with the same parameters, and it provides nothing more than names (and their financial metrics) of companies that match your screening criteria. I want to look for potential investment opportunities in ways that no one else is. I want to have an UNFAIR advantage over others by not using methods that are available to everyone in locating compelling opportunities. 

Here are a few methods I utilize in uncovering potential investment opportunities:

  • Read, read, read!
    • Content is a microcap investor's best friend. This can mean something different to everyone...perhaps it is camping out on SEDAR, SEDI, or the SEC website to obtain real-time company filings, or maybe its reading the Wall Street Journal every morning or your favorite financial websites. Regardless of what you choose to read, use it to your advantage. Once you read about something interesting, don't stop and move on, chase the content of the story even deeper, find out about the companies who do things that are "interesting" in the space. Let this be your starting point to extensive research into opportunities.
  • Surround yourself with people that are smarter than you
    • What you learn from others that you trust can be the best tool in your bag when it comes to finding exciting investment opportunities.  I will take "word of mouth" over stock screening for idea generation 100% of the time. And I am NOT talking about researching a company that 100 people on some message board are talking about; I am talking about researching a company that one or two others that you trust and engage with frequently are talking about. One caveat: let "word of mouth" ideas only be a starting point. Never blindly follow anyone into a position without being comfortable with it first. I have found that when you do this Mr. Market has a way of making you pay for such a mistake. 

There are things that you can do to provide yourself with significant leverage over other investors who are looking for new ideas just like you are. The keys to success are utilizing these methods that can eventually lead you into making an investment into a company that you know more about than others. Most importantly, unorthodox methods of locating ideas can lead you to invest in a company that you are highly engaged and interested in, and the more engaged and interested you are in the business of the company, the more likely you will focus on learning all you can about it.

Simply stated... finding companies in ways that others aren't is paramount to microcap investing success.